Are Banks Liable to the Victims of Ponzi Schemes?

Billions of dollars have been lost in recent years to fraudsters and Ponzi scheme artists. Sooner or later, the scam collapses leaving victims in a mad scramble to get back their hard earned money. The Bernie Madoff scandal came to light over 5 years ago yet many victims have received almost nothing.

Prosecutors, bankruptcy trustees and court appointed receivers work hard to claw back the ill-gotten gains from these criminals but sometimes there is little money to be found. Often Ponzi scheme artists take their victims money and blow it on lavish lifestyles, gambling, gifts and travel. In the story that you will read below, prosecutors say that some of the money went into a pornography business. That’s money that can’t be clawed back.

Other times we have seen two competing court receivers – appointed by different courts – battle over the funds. That is going on right now with Bernie Madoff and with PIWM fraudster Nikolai Battoo. Each receiver represents a different group of victims. Sometimes one group gets paid while the other doesn’t.

The real deep pockets in all these cases are the banks. Although they claim to be victims themselves, many profited from high fees and big deposits for years. Whether or not a bank is liable to the victims of a Ponzi scheme turns on the bank’s actions and knowledge.

If the bank directly aided and abetted the fraud, they are probably liable. Those cases are relatively infrequent but we have seen more than one bank lose because of the actions of a bank employee who crossed ethical lines.

The more frequent cases are those involving knowledge. They are also the toughest to prove. A bank has some duties to know its customers. Stringent anti-money laws require banks to pay attention to their larger clients.

Because of their training and ability to monitor accounts, banks are often in the best position to catch fraud. A lawsuit filed in Brooklyn will once again test the limits of lender liability.

Several victims of Philip Barry, a convicted Ponzi schemer serving 20 year, have filed a lawsuit against several banks including JPMorgan Chase, HSBC, TD Bank and M&T Bank. They claim the banks should be held liable for their losses. According to the lawsuit, between 2004 and 2009, Barry bounced over 1000 checks. They say that and large repetitive transactions should have served as a red flag. Had the banks done their due diligence, the scheme would have been uncovered.

We have successfully brought similar claims before. Absent actual misconduct by the bank, proving these cases is difficult. HSBC and TD Bank have recently been down this road making them somewhat more vulnerable.

If nothing else, Barry has become a familiar name among fraud recovery and Ponzi scheme lawyers. His scam began in 1978 and went on for decades. His scam was one of the longest running in history. In the end, prosecutors say he defrauded his victims out of approximately $40 million. His scheme came to an end in 2008 when the market crashed. Soon thereafter Barry turned himself in to authorities and was arrested.

Will the lender liability suit by Barry’s victims against Chase, HSBC, M&T and TD Bank be successful? We hope so.

Ultimately, if the case makes it to trial, jurors will have to decide what duty of investigation and due diligence each bank had and whether or not they violated that duty. That the banks made hundreds of thousands of dollars in profits and fees from Barry won’t help their case.

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If you lost money because of misconduct by a bank or other financial institution, give us a call. Are banks liable to the victims of Ponzi schemes? We believe the answer is “yes.”

For more information, contact attorney Brian Mahany at *protected email* or by telephone at (414) 704-6731 (direct). All inquiries always kept confidential.